Organizations that provide services or manufactured products constantly face a fundamental precept of business, that is to reduce the costs of providing a highly desirable product or service in order to maintain a Return on Investment attractive to the owners.
These forces have caused companies to reduce internal costs using continuous improvement processes (e.g. Six Sigma, Lean, etc) to eliminate non-value added costs associated with quality and long lead times. Non-value added costs are defined as those costs that do not add a form, feature or function that the customer values. Examples include the cost of obsolescence, scrap and rework, excess capital investment, costs associated with transportation, stockrooms, warehousing, scheduling and supervision, and low direct labor productivity.
Businesses have also expanded the breadth of their product offering to grow revenue and respond to market demand. However, the costs associated with increasing complexity of products and services offered results in non-value added costs that have hitherto been difficult or impossible to estimate relative to other non-value added costs. Some of this complexity has resulted from the historical addition of products and services with no thought of standardizing subcomponents. Some of the cost of complexity is due to the propensity to add new products without a corresponding effort to eliminate products. The lack of symmetrical effort is in part due to a lack of knowledge of the cost of complexity. This has inhibited businesses from eliminating products that add cost but do not earn an adequate return on investment. This invention provides methods to make a quantitative determination of the costs of complexity, versus those due to quality, long setup time, downtime, etc. This will make it possible for business entities to make rational investments in complexity reduction along with other process improvement initiatives. The process of determining the cost of complexity applies to manufactured products as well as service items. Because manufactured products are tangible, such will be used for purposes of initial exposition and then generalized to service processes.
The cost of product complexity arises in two dimensions. Business entities that have designed products or services often, over time create unique components, part numbers or subassemblies for each end item offered to customers. As the number of end items grows, so do the number of unique components and the associated complexity costs. With suitable redesign, several offerings or end items can use common components or subassemblies, reducing the cost of internal complexity which is transparent to the customer. This is referred to as Non-value Add complexity. For example, the first named inventor herein was the CEO of International Power Machines. Over a period of five years, eight separate mechanical and electrical designs had grown to provide uninterruptible power supplies with ratings of 10, 20, 25, 37.5, 50, 60, 80, and 100 KW. By suitable redesign, more than 90% of all mechanical and electrical components and subassemblies were made common. This is an example of non-value added complexity, because the customer derived no benefit from the internal differences. In the present invention equations have been derived which compute the excess inventories, learning curve, and related costs that were eliminated by this process, resulting in an increase in gross profit margin from 15% to 37%. Each standardized rating adds about 20 unique part numbers. Standardization reduces the number of incoming supplies from fewer vendors, driving larger volumes through fewer items also resulting in lower cost. This process of standardization is depicted in FIG. 1.
In principle, it is possible to design a platform which will pre-standardize the components of the rollout of a new family of products. Standardization has the merit of making breakthrough cost reductions without eliminating any customer facing products or services. The process of producing any product or service can be analyzed as a process which links activities where work is done. Some of this work adds value as perceived by the customer. Many activities, such as moving material, operating stock rooms, warehouses, performing rework, re-learning work, etc., add no value. Many of these costs are due to complexity of the product.
A second cost of complexity dimension is value optimization and customer facing complexity. Standardization that simply eliminates non-value added complexity can be executed once the costs are known. However, products whose features and functions are desired by the customer, i.e., value added complexity, may not earn their cost of capital and should be considered for removal, out-sourcing, re-pricing, or process improvements which will eliminate the costs of complexity. But the true cost of carrying the complexity of low volume products may not be disclosed by traditional accounting. The true cost may be disclosed by activity based costing (e.g. Kaplan), but may logically lead to the elimination of products that do not earn their cost of capital. This invention provides prioritized process improvement methods for eliminating the cost of complexity and retaining a potentially valuable source of business owner return. Analysis in accordance with the invention will also determine if a product or service cannot be suitably improved, within the market price, leading to its elimination to optimize business owner value. By ordering the Stock Keeping Units (SKU) by decreasing Return On Invested Capital (ROIC), a curve similar to FIG. 2 has resulted.
A purpose of the invention is to enable a business entity to estimate the relative benefits of complexity reduction such that rational investments can be made versus other priorities.
Essentially any business process can be analyzed as a series of steps or activities which, in the aggregate, add significantly to the cost of producing the product or providing the service. Certain value added activities in business processes are, of course, essential to providing the product or service desired by the customer and are characterized as value added steps. These steps add a form, feature or function to the offering or product for which the customer would be willing to pay. However, certain non-valued added activities may contribute cost into the overall process as a result of process deficiencies or result from the complexity of the product or service itself. Process deficiencies such as the defects due to variation in quality will create non-value added activities of rework, or, if scrapped, will cause additional replacement products to be produced. In service environments, correcting an invoice, implementing an engineering change notice, etc. are examples of non-value added activities. In both cases, the non-value added activities act to slow down the velocity of the product or service. According to Little's Law, for a given level of demand, a slowdown in cycle time will increase the amount of Work In Process.
Other process deficiencies are directly responsible for slowing the velocity of the process. For example, if an activity has a long setup time to changeover from one customer requirement to another, it will cause the operator to “lock on” to customer requirements to minimize the wasted time in setup. However, this approach means that some customer requirement must wait a long time in queue, resulting again in large amounts of Work in Process, and creating major congestion and delay. This will cause excessive investment in Work in Process which creates non-value added costs of stockrooms, exacerbating the quality problems and, lost revenue. In service environments, this problem can often be mitigated by hiring additional labor to meet customer demands. Other time related process deficiencies include downtime or absenteeism, long process in time, poor work organization, queue time due to variation in demand, service, and supply rates, etc. Methodologies such as the Toyota Production System, Kanban, Lean, and Lean Six Sigma have been used to accelerate process velocity and eliminate non-value added cost and excessive work in process.
The two process deficiencies related to quality and speed have the result of increasing the number of value added activities in a process and effectively lengthening the chain from input to output. Experience shows that the majority of activities in unimproved processes are non-value added.
There is a third independent source of non-value add cost, slow velocity and large Work In Process (WIP) that is due to the complexity of the service or product offering itself. This source has been qualitatively understood and is the subject of many articles. What has not been understood is how to quantitatively measure the amount of non-value added cost due to product complexity versus the non-value added cost due to quality and speed deficiencies. While improvements in all three areas are important, their relative importance must be quantitatively understood to make rational investments in process improvement. The present invention provides an unambiguous method that allows this determination. FIG. 3 illustrates the relative power of Lean, Six Sigma and Complexity Reduction in reducing the amount of WIP.